A Rapid Rebound: Chinese Stocks Set Record

By DAVID BARBOZA

Published: March 22, 2007

After a huge sell-off here just a few weeks ago that helped set off a drop in global financial markets, China's stock market has rebounded and rose to a record Wednesday.

Many investors say the sell-off on Feb. 27, when the Shanghai composite index plunged 8.8 percent, was simply a temporary setback in a galloping bull market.

After that drop, which pushed the index down to 2,771.79, share prices plunged around the world, including a 416-point drop in the Dow Jones industrial average in New York.

But instead of retreating from the volatile market, investors in China have seen the setback as temporary and eagerly opened new stock accounts, rushed to sign up to purchase mutual funds and aggressively bid up the shares of Chinese companies.

The Shanghai composite index rose 25.19 points Wednesday, to 3,057.38, a record. The Shenzhen component index reached 8,400.30, also close to a record.

''The market is promising in the long run,'' said Cao Zitao, an analyst at Guotai Junan Securities in Shanghai. ''Since the economy is doing well, there's no doubt the stock market will continue to grow over the next year or two.''

With China's economy booming and stock prices soaring, those left out of the boom now appear to be climbing into the market, buoying share prices.

Investors here have repeatedly ignored warnings from government officials and financial experts that share prices may be rising too fast or that a bubble may be emerging in shares.

China had the world's best-performing stock market last year, with the benchmark Shanghai composite soaring 130 percent in 2006. Now, just two and a half months into 2007, share prices are already up 14 percent in Shanghai and more than 26 percent in Shenzhen.

The rise in many ways mirrors the blistering pace of economic growth in this country, which has forced the government to raise interest rates several times in recent months in the hope of cooling things off. With corporate profits strong, some analysts said they could see no economic factors that would deal a severe blow to the market here.

But some analysts see parallels with the sharp rise and subsequent collapse of technology stocks in the late 1990's in the United States. In 1999 alone, the Nasdaq composite rose 85.6 percent. By March 2000, it reached a record that stands to this day. But that all came crashing down in spectacular fashion over the following few months. There were tentative signs of a rebound, but ultimately it never recovered. The Nasdaq closed at 2,455.92 on Wednesday, about half the value of its 2000 record.

Unreasonable expectations about stock prices, like those that characterized the technology boom, can wreak havoc on markets once those expectations go unfulfilled, said Todd Salamone, director of research for Schaffer's Investment Research. Mr. Salamone said similar expectations seem to surround the Chinese markets Wednesday.

''In the '90s when the Nasdaq went on that tear, investors began chasing the returns,'' Mr. Salamone said. ''Then your everyday investor catches wind of that, begins pouring money in, and the sector becomes vulnerable to major disappointment because expectations have risen so dramatically. The price action in China has created a stampede into that market, and it is in those instances where a sector or a region becomes extremely vulnerable.''

Some analysts also worry that a slowdown in the United States could pose problems since China's economy is so heavily dependent on trade with the United States and Europe.

For now, though, share prices are rising so fast that the nation's regulators are worried that heavy trading volumes could destabilize the brokerage system.

Along with investors, Chinese entrepreneurs and brokerage houses are reaping huge rewards from the market gains and from hot initial public stock offerings in Hong Kong and Shanghai.

Indeed, the market is so hot that regulators here recently barred companies from raising money on the stock market and then plowing those proceeds back into shares, including investing in initial public stock offerings.

Photo: Chinese investors have shrugged off the 8.8 percent one-day plunge on Feb. 27 and have resumed pouring money into the stock market. (Photo by Reuters)